CAPITAL AFFAIRS iv.

ISSUANCE

Issuance of certificate of stock

a. CERTIFICATE OF STOCK
i. NATURE OF THE CERTIFICATE
It is the written evidence of the shares of stock but it is not the share itself.
a. The certificate is merely a prima facie evidence of ownership and
evidence can be presented to determine the real owner of the shares.
b. Delivery is also essential for its issuance.
It is not essential to the existence of a share of stock or the creation of the relation
of the shareholder with the corporation (Tan v. SEC, G.R. No. 95696, March 3,
1992).
ii. UNCERTIFICATED SHARES
An uncertificated share is a subscription duly recorded in the corporate books but
has no corresponding certificate of stock yet issued.
It may only be issued until the full amount of the stockholder‟s subscription
together with the interest and expenses (in case of delinquent shares) if due has
been paid (Sec. 63, RCCP).
Requisites for the issuance of the certificate of stock
1. The certificate must be signed by the president or vice-president,
countersigned by the corporate secretary or assistant secretary
(Bitong v. CA, G.R. No. 123553, July 13, 1998).
2023NOTE: Unless it complies with the foregoing, it is not deemed issued.
2. The certificate must be sealed with the seal of the corporation.
3. The certificate shall be issued in accordance with the by-laws.
4. The certificate must be delivered.
5. The par value as to par value shares, or fullsubscription as to no par
value shares must befully paid, the basis of which is the doctrine
ofindivisibility of subscription.
6. The original certificate must be surrendered where the person
requesting the issuance of a certificate is a transferee from the
stockholder (Sec. 64, RCCP).

Stockholder may alienate his shares even if there is no certificate of stock (a) FULL PAYMENT
issued by the corporation Rule: Sec 63 prohibits the issuance of certificate of stock to a subscriber who has
The absence of a certificate of stock does not preclude the stock holder from not paid “the full amount of his subscription together with interest and expenses
alienating or transferring his shares of stock. (in case of delinquent shares), if any is due.

4BLUE 95 NOTE: The provision enunciates the doctrine that a subscription is

one, entire and indivisible contract, and therefore, it cannot be divided into
Transfers of fully paid subscription but the corporations has not yet issued a portions so that the stockholder shall not be entitled to the certificate of stock until
certificate of stock he has paid the full amount of his subscription together with interest and expenses,
if any is due.
In case of a fully paid subscription, without the corporation having issued a
certificate of stock, the transfer may be effected by the subscriber or stockholder (b) PAYMENT PRO-RATA
executing a contract of sale or deed of assignment covering the number of shares In the case of Baltazar v. Lingayen Gulf Electric Co., 14 SCRA 522 (1965), the
sold and submitting said contract or deed to the corporate secretary for recording. Court ruled that, unless prohibited by the by-laws, certificates of stock may be
issued for less than the number of shares subscribed provided the par value of each
of the stocks represented by said certificate has been fully paid.
Transfers of subscription not fully paid
In case of subscription not fully paid, the corporation may record such transfer, 4BLUE 95 NOTE: This provides a contrary view that a subscription is one, entire
provided that the transfer is approved by the board of directors and the transferee and indivisible contract.
executes a verified assumptionof obligation to pay the unpaid balance of the In other words, in the absence of provisions in the by-laws to the contrary, a
subscription. corporation may apply payments made by subscribers on account of their
subscriptions, either as:
1. full payment for the corresponding number of shares, the par value
of which is covered by such payment, or
2. as payment pro rata to each and all the entire number of shares
iii. NEGOTIABILITY; REQUIREMENTS FOR VALID TRANSFER OF subscribed for. This rule applies to all kinds and classes of stock
STOCKS corporations. The two alternatives cannot be availed of at the same
time (SEC Opinion, Feb. 7, 1968).
Stock certificate is not negotiable
Although a stock certificate is sometimes regarded as quasi-negotiable, in the
sense that it may be transferred by delivery, it is well-settled that the instrument is v. STOCK AND TRANSFER BOOK
NON-NEGOTIABLE, because the holder thereof takes it without prejudice to
such rights or defenses as the registered owner or creditor may have under the (a) CONTENTS
law, except insofar as such rights or defenses are subject to the limitations imposed 1. All stocks in the name of the stockholders alphabetically arranged;
by the principles governing estoppels(Republic v. Sandiganbayan,G.R. Nos. 2. Amount paid and unpaid on all stocks and the date of payment of
107789 & 147214, April 30, 2003). any installment;
3. Alienation, sale, or transfer of stocks;
Certificates of stock may be issued only to registered owners of stock. The 4. Other entries as the by-laws may prescribe (Sundiang Sr. & Aquino,
issuance of “bearer” stock certificates is not allowed under the law (SEC Opinion 2009).
No. 05-02, Jan. 31, 2005).
(b) WHO MAY MAKE VALID ENTRIES
The corporate secretary is the officer who is duly authorized to make entries on
Requirements for valid transfer of stocks the stock and transfer book. Hence, entries made by the Chairman or President are
1. If represented by a certificate, the following must be strictly invalid (Torres, Jr. v. CA, G.R. No. 120138, Sept. 5, 1997).
complied with:
a. Indorsement by the owner and his agent (c) STOCK TRANSFER AGENT
b. Delivery of the certificate A stock transfer agent or one engaged principally in the business of
c. To be valid to third parties and to the corporation, the registering transfers of stocks in behalf of a stockcorporation shall be allowed
transfer must be recorded in the books of the to operate in thePhilippines upon securing a license from theCommission and the
corporation (Rural Bank of Lipa v. CA, G.R. No. payment of a fee to befixed by the Commission, which shall berenewable
124535, Sepember 28, 2001). annually:
2. If NOT represented by a certificate (such as when the certificate has
not yet been issued or where for some reason is not in the possession Provided, That a stockcorporation is not precluded from performing ormaking
of the stockholder): transfers of its own stocks, in whichcase all the rules and regulations imposed
a. By means of deed of assignment; and onstock transfer agents, except the payment of alicense fee herein provided, shall
b. Such is duly recorded in the books of the be applicable:
corporation. (Sundiang Sr. & Aquino, 2009).
Provided, further, That the Commission mayrequire stock corporations which
transferand/or trade stocks in secondary markets tohave an independent transfer
agent(Sec. 64, RCCP).

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vi. LOST OR DESTROYED CERTIFICATES (Sec. 72, RCCP)
SEC. 72. Lost or Destroyed Certificates. – Thefollowing procedure shall be
followed by acorporation in issuing new certificates of stock in lieu of those which
have been lost, stolen or destroyed:
1. The registered owner of a certificate of stock in a corporation or such
person‟s legal representative shall file with the corporation an
affidavit in triplicate setting forth, if possible, the circumstances as to
how the certificate was lost,stolen, or destroyed, the number of
shares represented by such certificate, the serial number of the
certificate and the name of the corporation which issued the same.
The owner of such certificate of stock shall also submit such other
information and evidence as may be deemed necessary;
2. After verifying the affidavit and other information and evidence with
the books of the corporation, the corporation shall publish a notice in
a newspaper of general circulation in the place where the corporation
has its principal office, once a week for 3 consecutive weeks at the
expense of the registered owner of the certificate of stock which has
been lost, stolen or destroyed. The notice shall state the name of the
corporation, the name of the registered owner, the serial number of
the certificate, the number of shares represented by such certificate,
and shall state that after the expiration of 1 year from the date of the
last publication, if no contest has been presented to the corporation
regarding the certificate of stock, the right to make such contest shall
be barred and the corporation shall cancel the lost, destroyed or
stolen certificate of stock in its books. In lieu thereof, the
corporation shall issue a new certificate of stock, unless the
registered owner files a bond or other security as may be required,
effective for a period 1 year, for such amount and in such form and
with such sureties as may be satisfactory to the board of directors, in
which case a new certificate may be issued even before the
expiration of the 1 year period provided herein.
If a contest has been presented to the corporation or if an action is
pending in court regarding the ownership of the certificate of stock
which has been lost, stolen, or destroyed, the issuance of the new
certificate of stock in lieu thereof shall be suspended until the court
renders a final decision regarding the ownership of the certificate of
stock which has been lost, stolen or destroyed.
3. Except in case of fraud, bad faith, or negligence on the part of the
corporation and its officers, no action may be brought against any
corporation which shall have issued certificate of stock in lieu of
those lost, stolen, or destroyed pursuant to the procedure above-
described.
vii. SITUS OF THE SHARES OF STOCK
GR: The situs of shares of stock is the country where the corporation is domiciled
(Wells Fargo Bank v. CIR, G.R. No. L-46720, June 28, 1940).
The residence of the corporation is the place where the principal office of the
corporation is located as stated in its AOI even though the corporation has closed
its office therein and relocated to another place (Hyatt Elevators and Escalators
Corp. v. Goldstar Elevator Phils., Inc., supra.).
XPN: In property taxation –the situs of intangible property, such as shares of
stocks, is at the domicile or residence of the owner.
XPN to the XPN:
1. When a nonresident alien has shares of stock in a domestic corporation, then
the situs will be in the Philippines; and
2. For purposes of the estate tax, the gross estate of a resident decedent, whether
citizen or alien, or a citizen decedent, whether resident ornonresident, includes his
intangible personal property wherever situated (De Leon, 2010).
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b. WATERED STOCKS(Sec. 64, RCCP)
i. DEFINITION
Watered stocks are those issued not in exchange for its equivalenteither in cash,
property, share, stock dividends, or services; thus, the issuance of stocks is
prohibited.
ii. LIABILITY OF DIRECTORS FOR WATERED STOCKS
A director or officer of a corporation shall be liable to the corporation or its
creditors, solidarily with the stockholders concerned for the difference between the
value received at the time of issuance of the stock and the par or issued value of
the same, if he/she:
1. Consents to the issuance of stocks for a consideration less than its
par or issued value- including those issued without
consideration(bonus share) or issued as fully paid when the
corporation has received a lesser sum of money than its par or issued
value(discounted share);
2. Consents to the issuance of stock for a consideration other than cash
(e.g., property or service), values in excess of its fair value; or
3. Having knowledge of the insufficient consideration, does not file a
written objection with the corporate secretary (Sec. 64, RCCP).
iii. TRUST FUND DOCTRINE FOR LIABILITY FOR WATERED
STOCKS
The subscribed capital stock of the corporation is a trust fund for the payment
of debts of the corporation which the creditors have the right to look up to satisfy
their credits, and which the corporation may not dissipate. The creditors may sue
the stockholders directly for the latter’s unpaid subscription.
c. PAYMENT OF BALANCE OF SUBSCRIPTION (Sec. 66, RCCP)
Subject to the provisions of the subscription contract, the board of directors may,
at any time, declare due and payable to the corporation unpaid subscriptions and
may collect the same or such percentage thereof, in either case, with accrued
interest, if any, as it may deem necessary (Sec. 66, RCCP).
i. CALL BY BOARD OF DIRECTORS
Payment of unpaid subscription or any percentage thereof, together with any
interest accrued shall be made on the date specified in the subscription contract
or on the date stated in the call made by the board. Failure to pay on such date
shall render the entire balance due and payable and shall make the stockholder
liable for interest at the legal rate on such balance, unless a different interest rate is
provided in the subscription contract. The interest shall be computed from the date
specified, until full payment of the subscription. If no payment is made within 30
days from the said date, all stocks covered by the subscription shall thereupon
become delinquent and shall be subject to sale as hereinafter provided, unless
the board of directors orders otherwise (Sec. 66, RCCP).
ii. NOTICE REQUIREMENT
The notice of the call must be served on the stockholders concerned in the manner
prescribed in the call, which may either be by registered mail and/or personal
deliveryand publication.
Notice of call is necessary to bind the stockholders(Ibid., citing Baltazar v.
Lingayen Gulf Electric Power, G.R. No. L-16236, June 30, 1965).
2023 NOTES: The stockholders are given notice of the board resolution by the
corporate secretary, either personally or by registered mail.
d. SALE OF DELINQUENT SHARES (Sec. 67, RCCP)
i. EFFECT OF DELINQUENCY (Sec. 70, RCCP)
1. Deprives the stockholder the right to be voted for, to vote, or to
representation at any stockholder‟s meeting.
2. Delinquent stockholder shall not be entitled to any of the rights of a
stockholder; his rights are suspended except that he shall still be
entitled to dividends subject to the provisions of Sec. 42 (any cash
dividends due on delinquent stock shall first be applied to the
unpaid balance on the subscription plus costs and expenses, while
stock dividends shall be withheld from the delinquent stockholders
until their unpaid subscription is fully paid).
3. Delinquent stocks shall be subject to delinquency sale
NOTE: If the delinquent stockholder is a director, he shall continue
to be a director but he cannot run for re-election.
ii. CALL BY RESOLUTION OF THE BOARD OF DIRECTORS
Stocks become delinquent when the unpaid subscription and accrued interests
thereon are not paid within 30 days from their due date as specified in the
subscription contract or in the call by the board of directors.
The delinquency is automatic after said 30 day period and does not need a
declaration by the board making the stock delinquent.
iii. NOTICE OF SALE
Served on the subscribers either personally or registered mail and publication in a
newspaper of general circulation in the province or the city where principal office
I located once a week for 2 consecutive weeks.
Notice of sale shall state the amount due on each subscription plus the accrued
interest, and the date, time, and place of such sale which shall not be less than 30
days nor more than 60 days from the date the stocks became delinquent. (Sec. 67,
RCCP)
iv. AUCTION SALE
Such number of shares as may be necessary to pay the amount due on
subscription, plus interests, and other amounts due, will be sold at public auction.
The winner- the highest bidder is the person offering to pay the full amount of the
balance on the subscription with accrued interest, costs of advertisements, and
expenses of sale for the smallest number of shares or fraction of a share(Sec. 66,
RCCP).
Q: Arnold has in his name 1,000 shares of the capital stock of ABC Corporation as
evidenced by a stock certificate. Arnold delivered the stock certificate to Steven who now
claims to be the real owner of the shares, having paid for Arnold‟s subscription. ABC
refused to recognize and register Steven‟s ownership. Is the refusal justified? Explain.
(1996 BAR)
A: ABC‟s refusal to recognize and register Steven‟s ownership is justified. The facts
indicate that the stock certificate for the 1,000 shares in question is in the name of Arnold.
Although the certificate was delivered to Steven or that the procedure for the effective
transfer of shares of stock set out in the by- laws of ABC Corporation, if any, was
observed. Since the certificate was not endorsed in favor of Steven (or anybody else for
that matter), the only conclusion could be no other than that the shares in question still
belong to Arnold.
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e. ALINENATION OF SHARES(Sec. 62, RCCP)
SEC. 62. Certificate of Stock and Transfer of Shares. –
The capital stock of corporations shall be divided into shares for
which certificatessigned by the president or vice president,
countersigned by the secretary or assistant secretary, and sealed
with the seal of the corporation shall be issued in accordance with
the bylaws.
Shares of stock so issued are personal property and may be
transferred by delivery of the certificate or certificates indorsed by
the owner, his attorney-in-fact, or any other person legally
authorized to make the transfer. No transfer, however, shall be valid,
except as between the parties, until the transfer is recorded in the
books of the corporation showing the names of the parties to the
transaction, the date of the transfer, the number of the certificate or
certificates, and the number of shares transferred. The Commission
may require corporations whose securities are traded in trading
markets and which can reasonably demonstrate their capability to do
so to issue their securities or shares of stocks in uncertificated or
scripless form in accordance with the rules of the Commission.
No shares of stock against which the corporation holds any unpaid
claim shall be transferable in the books of the corporation.
i. ALLOWABLE RESTRICTIONS ON THE SALE OF SHARES
Requisites for a restriction to be valid
1. Restrictions are provided in the articles of incorporation;
2. It must be printed at the back of the certificate of stock; and
3. Must not be more onerous than the right of first refusal.
ii. SALE OF PARTIALLY PAID SHARES
iii. SALE OF ALL SHARES NOT FULLY PAID
The incomplete payment of the subscription does not preclude the subscriber
from alienating his shares of stock. However, the transfer shall be valid only
between the parties. The corporation has the right to refuse from recording the sale
in its books.
A transferee of the partially paid shares cannot compel the corporation to
record the transfer of shares in its books, even though he has no knowledge
that they are not fully paid
Shares of stock against which the corporation holds any unpaid claim shall not be
transferable in the books of the corporation. Hence, a transferee of the partially
paid shares cannot compel the corporation to record the transfer of shares in its
books, even though he has no knowledge that they are not fully paid (Sec. 62,
RCCP).
Liability of the transferee for the balance of the purchase price in case the
stockholder on record fails to pay the same
In case the stockholder on record fails to pay the pay the balance of the purchase
price, he is still liable for the balance of the purchase price.Unless the transfer of
the shares is recorded, the stockholder is still the owners of the shares as far as the
corporation is concerned.
REASON: The subscriber is as much bound to pay his subscription as he would
be to pay any other debt (Nava v. Peers Marketing Corp., G.R. No. L-28120
November 25, 1976).
iv. SALE OF A PORTION OF SHARES NOT FULLY PAID
A stockholder who has not paid the full amount of his subscription cannot
transfer a portion of his subscription in view of the indivisible nature of the
subscription contract.
v. SALE OF FULLY PAID SHARES
Sale of fully paid shares is allowed even without the consent of the corporation as
long as the requisites for the valid transfer of shares are complied.
vi. REQUISITE OF A VALID TRANSFER
1. If represented by a certificate, the following must be strictly
complied with:
a. Indorsement by the owner and his agent;
b. Delivery of the certificate;
c. To be valid to third parties and to the corporation, the
transfer must be recorded in the books of the
corporation(Rural Bank of Lipa v. CA, G.R. No.
124535, September 28, 2001); and
d. No shares of stock against which the corporation holds
any unpaid claim shall be transferrablein the books of
the corporation(Sec. 62, RCCP).
NOTE: Unpaid claim refers to claim arising from
unpaid subscription, and not to any indebtedness which
a stockholder or subscriber may owe to the corporation
arising from any other transaction.
2. If NOT represented by a certificate (such as when the certificate
has not yet been issued or where for some reason is not in the
possession of the stockholder):
a. By means of deed of assignment; and
b. Such is duly recorded in the books of the corporation.
vii. INVOLUNTARY DEALINGS
It refers to such writ, order, or processissued by a court of record affecting shares
of stocks which by law should be registered to be effective, and also to such
instruments which are not the willful acts of the registered owner and which may
have been executed even without his knowledge or against his consent.
Examples of involuntary dealings of a share
1. Attachment
2. Sale on execution of judgment or sales for taxes
3. Adverse claims
4. Foreclosure of mortgage of stocks
Involuntary dealings must be registered
It is the act of registration which creates a constructive notice to the whole world
of such instrument or court writ or process and is the operative act that conveys
ownership (Aquino, 2007).
Q: Mr. Balimbing signed a written subscription for 100 shares of stock of Laban and Co.,
paying 25% of the amount thereof. The corporation subsequently became insolvent due to
a series of financial reverses. Mr. Balimbing demanded from the Corporate Secretary the
stock certificates corresponding to 25 shares which he claimed was already paid. Since
the corporation was insolvent, Mr. Balimbing refused to pay for his remaining unpaid
subscription. a. Can the Corporate Secretary validly refuse to issue stock certificates in
the name of Mr. Balimbing for 25 shares despite the payment of 25% of the subscription
of 100 shares? Reasons. b. Is Mr. Balimbing correct in refusing to pay for the remaining
shares, the Company being already insolvent? Reasons. (1989 BAR)
A: a. YES, the Corporation Code expressly provides that no certificate of stock shall be
issued unless the full amount of the subscription is paid. This is to say that a partial
payment of the subscription amount is allocated or apportioned to the entire number of
the subscribed shares and, therefore, each share subscribed by Mr. Balimbing would been
paid only to the extent of 25% thereof. b. The refusal of Mr. Balimbing to pay is not
correct. The obligation to pay for unpaid subscription is a liability of Mr. Balimbing that
has not yet been discharged but is instead entrenched under the trust fund doctrine upon
the insolvency of the corporation.
Q: Juan was a stockholder of X Corporation. He owned a total of 500 shares evidenced
by Certificate of Stock No. 1001. He sold the shares to Pedro. After getting paid, Juan
indorsed and delivered said certificate of Stock No. 1001 to Pedro. The following day,
Juan went to the offices of the corporation and claimed that his Certificate of Stock No.
1001 was lost and that, despite diligent efforts, the certificate could not be located. The
formalities prescribed by law for the replacement of the “lost” certificate, Certificate of
Stock No. 2002. Juan forthwith transferred for valuable consideration the new certificate
to Jose who knew nothing of the previous sale to Pedro. In time, the corporation was
confronted with the conflicting claims of Pedro and Jose. Between Pedro and Jose, whom
should the corporation so recognize as the rightful stockholder? (1997 BAR)
A: If there is no over-issuance of shares resulting from the two transactions of Juan, the
corporation should recognize both Pedro and Jose as rightful stockholders. This is
without prejudice to the right of the corporation to claim against Juan for the value of the
shares which Juan sold to Jose.
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f. CORPORATE BOOKS AND RECORDS
i. RECORDS TO BE KEPT AT PRINCIPAL OFFICE (Sec. 73, RCCP).
A corporation is required to keep and preserve at its principal office corporate
books/ documents/ information/ records such as, but not limited to, the following:
1. The Articles of Incorporation and By-laws of the corporation and
all their amendments;
2. The current ownership structure and voting rights of the
corporation, including lists of stockholders or members, group
structures, intra-group relations, ownership data, and beneficial
ownership;
3. The names and addresses of all the members of the board of
directors or trustees and the executive officers;
4. A record of all business transactions;
5. A record of the resolutions of the board of directors or trustees
and of the stockholders or members;
6. Copies of the latest reportorial requirements submitted to the
Commission; and
7. The minutes of all meetings of stockholders or members, or of the
board of directors or trustees.
ii. RIGHT TO INSPECT CORPORATE RECORDS(Sec. 73, RCCP)
Corporate records, regardless of the form in which they are stored, shall be open to
inspection by any director, trustee, stockholder or member in person or by a
representative and a written demand may be made by said director/ trustee,
stockholder/ member to secure copies or excerpts from the records under the
following conditions:
1. The right must be exercised at reasonable hours on business days;
2. The director, trustee, stockholder, or member has not improperly
used any information he secured through any previous examination;
3. Demand is made in good faith or for a legitimate purpose;
4. The inspecting or reproducing party must respect and is bound by
confidentiality rule under prevailing laws such as the Intellectual
Property Code, Data Privacy Act, Securities Regulation Code, and
the Rules of Court.
5. The requesting party who is not a stockholder or member of record,
or who is a competitor, director, officer, controlling stockholder or
otherwise represents the interest of a competitor shall have no right
to inspect or demand reproduction of corporate records.
NOTE: the right to inspect is available even if the corporation has
already been dissolved (its certificate of incorporation was revoked)
and its assets are pending liquidation.
iii. EFFECT OF REFUSAL TO INSPECT CORPORATE RECORDS
1. Summary investigation- If the corporation denies or does not act
on a demand for inspection and/ or reproduction of corporate books
or records, the aggrieved party may report such denial or inaction to
the SEC.Within 5 days from receipt of such report, the SEC shall
conduct a summary investigation and issue an order directing the
inspection or reproduction of the requested records;
2. Mandamus- it is a proper remedy if the stockholder is being
improperly deprived of his right to inspect;
3. Criminal action under Sec. 161 of the RCCP is also an available
remedy.
4BLUE 95 NOTE: Any officer or agent of the corporation who shall refuse to
allow the inspection and/or reproduction of records in accordance with the
provisions of this Code shall be liable to such director, trustee, stockholder or
member for damages, and in addition, shall be guilty of an offense which shall
be punishable under Section 161 of this Code:
Provided, That if such refusal is made pursuant to a resolution or
order of the board of directors or trustees, the liability under this
section for such action shall be imposed upon the directors or
trustees who voted for such refusal:
Provided further, That it shall be a defense to any action under this
section that the person demanding to examine and copy excerpts
from the corporation‟s records and minutes has improperly used any
information secured through any prior examination of the records or
minutes of such corporation or of any other corporation, or was not
acting in good faith or for a legitimate purpose in making the
demand to examine or reproduce corporate records, or is a
competitor, director, officer, controlling stockholder or otherwise
represents the interests of a competitor.
If the corporation denies or does not act on a demand for inspection and/or
reproduction, the aggrieved party may report such to the Commission. Within 5
days from receipt of such report, the Commission shall conduct a summary
investigation and issue an order directing the inspection or reproduction of the
requested records (Sec. 73, RCCP).
STOCK AND TRANSFER BOOK
Q: What is a stock and transfer book? (2009 BAR) A: A stock and transfer book is a book
which records all stocks in the name of the stockholders alphabetically arranged; the
installments paid or unpaid on all stocks for which subscription has been made and the
date of payment of any installment, a statement of every alienation, sale or transfer of
stock made, the date thereof, and by and to whom made; and such other entries as the by-
laws may prescribe. Transfer of stock Q: “A” is the registered owner of Stock Certificate
No. 000011. He entrusted the possession of said certificate to his best friend “B” who
borrowed the said endorsed certificate to support B‟s application for passport (or for a
purpose other than transfer). But “B” sold the certificate to “X”, a bona fide purchaser
who relied on the endorsed certificates and believed him to be the owner thereof. Can
“A” claim the shares of stocks from “X”? Explain. (2001 BAR)
A: NO. Assuming that the shares were already transferred to “B”, “A” cannot claim the
shares of stock from “X” the certificate of stock covering said shares have been duly
endorsed by “A” and entrusted by him to “B”. By his said acts “A” is now estopped from
claiming said shares from “X”, a bona fide purchaser who relied on the endorsement by
“A” of the certificate of stock.
Q: Four months before his death, PX assigned 100 shares of stock registered in his name
in favor of his wife and his children. They then brought the deed of assignment to the
proper corporate officers for registration with the request for the transfer in the
corporation‟s stock and transfer books of the assigned shares, the cancellation of the stock
certificates in PX‟s name, and the issuance of new stock certificates in the names of his
wife and his children as the new owners. The officers of the Corporation denied the
request on the ground that Commercial Law 66 another heir is contesting the validity of
the deed of assignment. May the Corporation be compelled by mandamus to register the
shares of stock in the names of the assignees? Explain briefly. (2004 BAR)
A: YES. The corporation may be compelled by mandamus to register the shares of stock
in the name of the assignee. The only legal limitation imposed by Section 63 of the
Corporation Code is when the Corporation holds any unpaid claim against the shares
intended to be transferred. The alleged claim of another heir of PX is not sufficient to
deny the issuance of new certificates of stock to his wife and children. It would be
otherwise if the transferee‟s title to the shares has no prima facie validity or is uncertain.
Q: Because of disagreement with the BOD and a threat by the BOD to expel her for
misconduct and inefficiency, Carissa offered in writing to resign as President and
member of the BOD, and to sell to the company all her shares therein for P300,000.00
Her offer to resign was effective as soon as my shares are fully paid. At its meeting, the
BOD accepted Carissa„s resignation, approved her offer to sell back her shares of stock to
the company, and promised to buy the stocks on a staggered basis. Carissa was informed
of the BOD Resolution in a letteragreement to which she affixed her consent. The
Company„s new President signed the promissory note. After payment P100,000 the
company defaulted in paying the balance of P200,000. Carissa wants to sue the Company
to collect the balance. If you were retained by Carissa as her lawyer, where will you file
the suit? A) Labor Arbiter; b) RTC; or c) SEC? (2014 BAR)
A: RTC has jurisdiction. Under Section 5.2 of the SRC, the commission‟s jurisdiction
over all cases enumerated under Section 5 of PD 902-A is hereby transferred to the
Courts of general jurisdiction or the appropriate Regional Trial Court: Provided, That the
Supreme Court in the exercise of its authority may designate the Regional Trial Court
branches that shall exercise jurisdiction over these cases. The Commission shall retain
jurisdiction over pending cases involving intra- corporate disputes submitted for final
resolution which should be resolved within 1 year from the enactment of this Code. The
commission shall retain jurisdiction over pending suspension of payments/rehabilitation
cases filed as of 30 June 2000 until finally disposed.
CAPITAL STRUCTURE
Subscription Agreements
Q: What tools are available to the stockholders to replenish capital? (1999 BAR) A: In
the face of the refusal of the creditor- banks to grant more loans, the following are tools
available to the stockholders to replenish capital, to wit: (1) additional subscription to
shares of stock of the corporation by stockholders or by investors; (2) advances by the
stockholders to the corporation; (3) payment of unpaid subscription by the stockholders.
Payment of balance of subscription
Q: A, B and C are shareholders of XYZ Company. A has an unpaid subscription of
P100,000, B‟s shares are fully paid up, while C owns only nominal but fully paid up
shares and is a director and officer. XYZ Company becomes insolvent, and it is
established that the insolvency is the result of fraudulent practices within the company. If
you were counsel for a creditor of XYZ Company, would you advice legal action against
A, B and C? (1997 BAR)
A: a. An action can be brought against A for P100,000 which is the amount of his unpaid
subscription. Since the corporation is insolvent, the limit of a stockholder‟s liability to the
creditor is only up to the extent of his unpaid subscription.
b. There is no cause of action against B because he has already fully paid for his
subscription. As stated earlier, the limit of the stockholder‟s liability to the creditor of the
corporation, when the latter becomes insolvent, is the extent of his subscription.
c. An action can be filed against C, not as a stockholder because he has already paid up
the shares, but in his capacity as director and officer because of the corporation‟s
insolvency being the result of fraudulent practices within the company.
Directors are liable jointly and severally for damages sustained by the corporation,
stockholders or other persons resulting from gross negligence or bad faith in directing the
affairs of the corporation.
5
Q: The Board of Directors of a corporation, by a vote of ten in favor and one against,
declared due and payable all unpaid subscription to the capital stock. The lone dissenting
director failed to pay on due date, i.e., September 19, 1997, his unpaid subscription. Other
than the shares wherein he was unable to complete payment, he did not own any share in
the corporation. On September 23, 1997, he was informed by the Board of Directors that,
unless due payment is meanwhile received, he: a. Could no longer serve as a director of
the corporation forthwith; b. Would not be entitled to the cash and stock dividends which
were declared and payable on September 24, 1997; and c. Could not vote in the
stockholders meeting scheduled to take place on September 26, 1997. Was the action of
the Board of Directors on each of the foregoing matters valid? (1997 BAR)
A:
a. NO. The period 30 days within which the stockholder can pay the unpaid subscription
had not yet expired.
b. NO. The delinquency did not deprive the stockholder of his right to receive dividends
declared. However, the cash dividend declared may be applied by the corporation to the
unpaid subscription.
c. NO. The period of 30 days within which the stockholder can pay the unpaid
subscription had not yet expired. Consideration for Stocks
Q: Janice rendered some consultancy work for XYZ Corporation. Her compensation
included shares of stock therein. Can XYZ Corporation issue shares of stock to pay for
the service of Janice as its consultant? Discuss your answer. (2005 BAR)
A: The corporation can issue shares of stock to pay for actually performed services to the
corporation, but not for future services or services yet to be performed.
Q: Victor was employed in MAIA Corporation. He subscribed to P1,500 shares of the
corporation at P100 per share or a total of P150,000. He made an initial down payment of
P37,500. He was appointed President and General Manager. Because of his disagreement
with the Board of Directors, he resigned and demanded payment of his unpaid salaries,
his cost of living allowance, his bonus, and reimbursement of his gasoline and
representation expenses. MAIA Corporation admits that it owed Victor P40,000 but told
him that this will be applied to the unpaid balance of his subscription in the amount of
P100,000. There was no call or notice for the payment of the unpaid subscription. Victor
questioned the set-off. a. May MAIA set-off unpaid subscription with Victor‟s claim for
salaries? b. Would your answer be the same if indeed there had been a call for the unpaid
subscription? (1994 BAR)
A:
a. NO. MAIA cannot set-off the unpaid subscription with Victor‟s claim for salaries. The
unpaid subscription is not yet due as there is no call.
b. YES. The reason is that Victor is entitled to the payment of his salaries which MAIA
has no right to withhold in payment of unpaid subscription. To do so would violate Labor
Laws.
Watered Stock - Liability of Directors for Watered Stocks
Q: What is “watered stock” and what is the legal consequence of the issuance of such
stock? (2015 BAR)
A: Watered stocks are stocks issued for a consideration less than its par or issued value or
for a consideration in any form other than cash, valued in excess of its fair value. Any
director or officer of a corporation consenting to the issuance of watered stocks or who,
having knowledge thereof, does not forthwith express his objection in writing and file the
same with the corporate secretary shall be solidarily liable with the stockholder concerned
to the corporation and its creditors for the difference between the fair value received at
the time of issuance of the stock and the par or issued value of the same. (Section 65 of
the Corporation Code)
Q: Mr. Y filed a case captioned as "Injunction with Prayer for Status Quo Order,
Temporary Restraining Order and Damages" against Z Company to prohibit the latter
from selling shares which Mr. Y purportedly bought from Z Company. Mr. Y alleged that
the subscription for the said shares was already partly paid by him, but the subject shares
were nonetheless being offered for sale by Z Company to the corporation's other
stockholders. a. Is the case filed by Mr. Y against Z Company considered an intra-
corporate dispute? Explain. b. Assuming that it was Z Company which instead filed a
case against Mr. Y in order to collect the unpaid balance of his stock subscriptions, is the
case considered an intra-corporate dispute? Explain. (2019 BAR)
A;
a. The case is not considered an intra-corporate dispute. To determine if a case involves
an intra-corporate controversy, the Supreme Court has consistently applied two tests: the
relationship test and the nature of the controversy test. Under the relationship test, an
intra-corporate controversy arises when the conflict is "between the corporation,
partnership or association and its stockholders, partners, members or officers". The nature
of the controversy test examines the controversy in relation to the "enforcement of the
parties' correlative rights and obligations under the Corporation Code and the internal and
intracorporate regulatory rules of the corporation”. It is not yet certain that Mr. Y is a
stockholder of Z Company. Thus, the first test is not present. Even assuming that the
parties are stockholders of the corporation and as such, satisfy the relationship test, the
dispute is not rooted in the existence of intra-corporate relationship. The action for
injunction to stop the sale of shares does notpertain to the enforcement of the parties‟
rights and obligations under the Corporation Code.
b. YES, both relationship and nature of the controversy tests are present. The dispute is
between the stockholder and the corporation. The issue of unpaid subscription pertains to
the enforcement of their rights and obligations under the Corporation Code.
DISSOLUTION
Dissolution- Extinguishment of the franchise of a corporation and the
termination of its corporate existence.
a. MODES OF DISSOLUTION
i. VOLUNTARY DISSOLUTION
(a) WHERE NO CREDITORS ARE AFFECTED (Sec. 134, RCCP)
1. A meeting must be held on the call of directors or trustees;
2. Notice of the meeting should be given to the stockholders by
personal delivery or registered mail at least 20 days prior to the
meeting;
3. The notice of meeting should also be published once in a
newspaper published in the principal office or if there is no such
newspaper, in a newspaper of general circulation in the Philippines;
4. The resolution to dissolve must be approved by the MAJORITY of
the directors/ trustees and approved by the stockholders
representing at least MAJORITY of the outstanding capital stock or
MAJORITY of members;
5. A verified REQUEST for dissolution shall be filed with the SEC
and the latter will issue the certificate of dissolution within 15 days
from receipt of the verified request.
(b) WHERE CREDITORS ARE AFFECTED (Sec. 135, RCCP)
1. Approval of the stockholders representing at least 2/3 of the
outstanding capital stock or 2/3 of members in a meeting called for
that purpose;
2. It is necessary to file a verified PETITION with the SEC signed by
majority of directors or trustees or other officers having the
management of its affairs, verified by the President or Secretary or
Director. Claims and demands must be stated in the petition;
3. The SEC shall issue an order fixing the deadline for filing
objections, which shall be no less than 30 days nor more than 60
daysafter the entry of the order;
4. A copy of the order shall be published at least once a week for 3
consecutive weeks in 3 public places in the city or municipality;
5. After the expiration of the time to file objections, a hearing shall be
conducted upon prior 5-day notice to hear the objections;
6. Judgement shall be rendered dissolving the corporation and
directing the disposition of assets; the judgment may include
appointment of a receiver;
7. The dissolution if effective upon issuance by the SEC of the
certificate of dissolution.
(c) SHORTENING OF CORPORATE TERM (Sec. 136, RCCP)
A voluntary dissolution may be effected by amending the articles of
incorporation to shorten the corporate term pursuant to the provisions of this
Code. A copy of the amended articles of incorporation shall be submitted to the
Commission in accordance with this Code.
Upon the expiration of the shortened term, as stated in the approved amended
articles of incorporation, the corporation shall be deemed dissolvedwithout any
further proceedings, subject to the provisions of this Code on liquidation.
In the case of expiration of corporate term, dissolution shall automatically take
effect on the day following the last day of the corporate term stated in the
articles of incorporation, without the need for the issuance by the Commission of a
certificate of dissolution.
(d) WITHDRAWAL OF DISSOLUTION (Sec. 137, RCCP)
Withdrawal of Request and Petition for Dissolution
A withdrawal of the requestfor dissolution shall be made in writing, duly
verified by any incorporator, director, trustee, shareholder, or member and signed
by the same number of incorporators, directors, trustees, shareholders, or members
necessary to request for dissolution as set forth in the foregoing sections
(majority). The withdrawal shall be submitted no later than 15 days from receipt
by the Commission of the request for dissolution. Upon receipt of a withdrawal of
request for dissolution, the Commission shall withhold action on the request for
dissolution and shall, after investigation:
1. make a pronouncement that the request for dissolution is deemed
withdrawn;
2. direct a joint meeting of the board of directors or trustees and the
stockholders or members for the purpose of ascertaining whether to
proceed with dissolution; or
3. issue such other orders as it may deem appropriate.
A withdrawal of the petition for dissolution shall be in the form of a motion and
similar in substance to a withdrawal of request for dissolution but shall be verified
and filed prior to publication of the order setting the deadline for filing objections
to the petition.
6
ii. INVOLUNTARY DISSOLUTION (Sec. 138, RCCP)
By filing a verified COMPLAINT with the SEC based on any ground provided
by law or rules, including:
1. Non-use of corporate charter as provided under Sec. 21 of the Code;
2. Continuous inoperation of a corporation as provided under Sec. 21
of this Code;
3. Upon receipt of a lawful court order dissolving the corporation;
4. Upon finding by final judgment that the corporation procured its
incorporation through fraud;
5. Upon finding by final judgment that the corporation:
a. Was created for the purpose of committing, concealing
or aiding the commission of securities violations,
smuggling, tax evasion, money laundering, or graft and
corrupt practices;
b. Committed or aided in the commission of securities
violations, smuggling, tax evasion, money laundering,
or graft and corrupt practices, and its stockholders
knew of the same; and
c. Repeatedly and knowingly tolerated the commission of
graft and corrupt practices or other fraudulent or illegal
acts by its directors, trustees, officers, or employees.
4BLUE 95 NOTE: If the corporation is ordered dissolved by final
judgment pursuant to the grounds set forth in subparagraph (5)
hereof, its assets, after payment of its liabilities, shall, upon petition
of the SEC with the appropriate court, be forfeited in favor of the
national government. Such forfeiture shall be without prejudice to
the right of innocent stockholders and employees for services
rendered, andto the application of other penalty or sanction under the
RCCP or other laws.
Q: XYZ Corporation entered into a contract of lease with ABC, Inc., over a piece
of real estate for a term of 20 years, renewable for another 20 years, provided that
XYZ‟s corporate term is extended in accordance with law. Four years after the
term of XYZ Corporation expired, but still within the period allowed by the lease
contract for the extension of the lease period, XYZ Corp. notified ABC Inc., that it
is exercising the option to extend the lease. ABC Inc. objected to the proposed
extension, arguing that since the corporate life of XYZ Corp. had expired, it could
no longer opt to renew the lease. XYZ Corp. countered that withstanding the lapse
of its corporate term it still has the right to renew the lease because no quo
warranto proceedings for involuntary dissolution of XYZ Corp. has been instituted
by the Office of the Solicitor General. Is the contention of XYZ Corp.
meritorious? Explain briefly. (2004 BAR)
A: XYZ Corporation‟s contention is not meritorious. Based on the ruling of the
Supreme Court in Philippine National Bank v. CFI of Rizal, 209 SCRA (1992).
XYZ Corp. was dissolved ipso facto upon the expiration of its original term. It
ceased to be a body corporate for the purpose of continuing the business for which
it was organized, except only for purposes connected with its winding up or
liquidation. Extending the lease is not an act to wind up or liquidate XYZ Corp.‟s
affairs. It is contrary to the idea of winding up the affairs of the corporation.
Q: “X” Corporation shortened its corporate life by amending its articles of
incorporation. It has no debts but owns a prime property located in Quezon City.
How would the said property be liquidated among the five stockholders of said
corporation? Discuss two methods of liquidation. (2001 BAR)
A: The prime property of “X” Corporation can be liquidated among the five
stockholders after the property has been conveyed by the corporation to the five
stockholders, by dividing or partitioning it among themselves in any two of the
following ways:
1. By physical division or partition based on the proportion of the values of their
stockholdings; or
2. Selling the property to a third person and dividing the proceeds among the five
stockholders in proportion to their stockholdings; or
3. After the determination of the value of the property, by assigning or transferring
the property to one stockholder with the obligation on the part of said stockholder
to pay the other four stockholders the amount/s in proportion to the value of the
stockholding of each.
Q: Name 3 methods by which a stock corporation may be voluntarily dissolved.
Explain each method. (2002 BAR)
A: The 3 methods by which a stock corporation may be voluntarily dissolved are:
1. Voluntary dissolution where no creditors are affected. This is done by a
majority vote of the directors, and resolution of at least 2/3 vote of stockholders,
submitted to the SEC.
2. Voluntary dissolution where creditors are affected. This is done by a petition for
dissolution which must be filed with the SEC, signed by a majority of the
members of the board of directors, verified by the president or secretary, and upon
affirmative vote of stockholders representing at least 2/3 of the outstanding capital
stock.
3. Dissolution by shortening of the corporate term. This is done by amendment of
the articles of incorporation.
LIQUIDATION
Liquidation- Process by which all the assets of the corporation are converted into
liquid assets (cash) in order to facilitate the payment of obligations to creditors and
the remaining balance if any is to be distributed to the stockholders (Sundiang Sr. &
Aquino, 2014).
i. BY THE CORPORATION ITSELF/ By the Board of Directors
Every corporation (1) whose charter expires pursuant to its articles of incorporation, (2) is
annulled by forfeiture, or (3) whose corporate existence is terminated in any other
manner:
1. Shall nevertheless remain as a body corporate for3 years after the
effective date of dissolution;
2. For the purpose of
a. Prosecuting and defending suits byor against it;
b. Enabling it to settle and close its affairs;
c. Dispose of and convey its property, and;
d. Distribute its assets.
3. But not for the purpose of continuing the business for which it was
established(Sec. 139 (par. 1), RCCP).
ii. COVEYANCE TO A TRUSTEE WITHIN A THREE-YEAR PERIOD
At any time during said three (3) years, the corporation is authorized and empowered to
convey all of its property to trustees for the benefit of stockholders, members, creditors
and other persons in interest. After any such conveyance by the corporation of its
property in trust for the benefit of its stockholders, members, creditors and others in
interest, all interest which the corporation had in the property terminates, the legal
interest vests in the trustees, and the beneficial interest in the stockholders, members,
creditors or other personsin-interest.
Q: The corporation, once dissolved, thereafter continues to be a body corporate for
three years for purposes of prosecuting and defending suits by and against it and of
enabling it to settle and close its affairs, culminating in the final disposition and
distribution of its remaining assets. If the 3 year extended life expires without a
trustee or receiver being designated by the corporation within that period and by
that time (expiry of the 3 year extended term), the corporate liquidation is not yet
over, how, if at all, can a final settlement of the corporate affairs be made? (1990
BAR) A: The liquidation can continue with the winding up. The members of the
BOD can continue with the winding of the corporate affairs until final liquidation.
They can act as trustees or receivers for this purpose.
iii. BY MANAGEMENT COMMITTEE OR REHABILITATION RECEIVER
In the case of a dissolution order where creditors are affected, the SEC may appoint a
receiver to take charge of the liquidation of the corporation (Sec. 135, RCCP).
4BLUE 95 NOTE: Thus, the appointment of receiver is addressed to the sound
discretion of the court or the SEC.
Appointment of receiver for a going corporation
The appointment of a receiver for a going corporation is a last resort remedy, and should
not be employed when another remedy is available. Relief by receivership is an
extraordinary remedy and is never exercised if there is an adequate remedy at law or if
the harm can be prevented by an injunction or a restraining order. Bad judgment by
directors, or even unauthorized use and misapplication of the company‟s funds, will not
justify the appointment of a receiver for the corporation if appropriate relief can
otherwise be had (Rev. Ao-As v. CA, G.R. No. 128464, June 20, 2006).
Even without dissolution, the court has authority to appoint a receiver for a corporation to
protect and preserve its properties for the use and benefit of its creditors and others who
may have similar interests in the property as where there is already a final and executory
judgment against the corporation, which is in a precarious financial condition (Central
Sawmills, Inc. v Alto Surety and Ins. Co., 27 SCRA 247 (1969)).
Where corporate directors are guilty of breach of trust, minority stockholders may ask for
receivership [Chase v. CFI, 18 SCRA 602 (1966)].
The corporation, through its president cannot condone penalties and charges after it
had been placed under receivership
The appointment of a receiver operates to suspend the authority of a corporation and of
its directors and officers over its property and effects, such authority being reposed in the
receiver (Yam v. CA, G.R. No. 104726, February 11, 1999).
Corporate Rehabilitation
It refers to the restoration of the debtor to a condition of successful operation and
solvency, if it is shown that its continuance of operation is economically feasible and its
creditors can recover by way of the present value of payments projected in the plan, more
if the debtor continues as a going concern than if it is immediately liquidated
Nature of Rehabilitation proceedings
Rehabilitation proceedings are summary and non-adversarial in nature, and do not
contemplate adjudication of claims that must be threshed out in ordinary court
proceedings.
The jurisdiction of the rehabilitation court is over claims against the debtor that is under
rehabilitation, not over claims by the debtor against its own debtors or against third
parties. The corporation under rehabilitation must file a separate action against its
debtors/insurers to recover whatever claim it may have against them.
Stay order and appointment of rehabilitation receiver
Under Section 6(c) of PD 902-A, receivers may be appointed whenever:
1. Necessary in order to preserve the rights of the parties-litigants; and/or
2. Protect the interest of the investing public and creditors.
7
iv. LIQUIDATION AFTER THREE YEARS
1. If full liquidation can only be effected after the three-year period and there
is no trustee, the directors may be permitted to complete the liquidation by
continuing as trustees by legal implication.
2. Cases that were filed while the corporation was still in existence and
remain pending when the three-year liquidation period expired may be
continued by the trustees or directors until rendition of the final judgment,
even if such judgment is rendered beyond the three-year period allowed
under Sec. 139.
3. The trustee or receiver can maintain an action for the corporation even
after the three-year period. This is supported by the 2 nd paragraph of Sec.
139 of the RCCP which states that there is transfer of interest to the trustee
(which rule applies to receivers).
2023 NOTE: Except as otherwise provided for in Sections 93 and 94 of this Code, upon
the winding up of corporate affairs, any asset distributable to any creditor or stockholder
or member who is unknown or cannot be found shall be escheated in favor of the national
government.
Except by decrease of capital stock and as otherwise allowed by this Code, no
corporation shall distribute any of its assets or property except upon lawful dissolution
and after payment of all its debts and liabilities (Sec. 139 (par. 1), RCCP).
Q: Bam filed an action to enjoin SN Company‟s Board of Directors from selling a
parcel of land registered in the corporation‟s name, to compel the corporation to
recognize Bam as a stockholder with 50 shares, to allow him to inspect the
corporate books, and to claim damages against the corporation and its officers.
Subsequently, the corporation and the individual defendants moved to dismiss the
complaint since the corporation‟s certificate of registration was revoked by the
SEC during the pendency of Bam‟s case on the ground of noncompliance with
reportorial requirements. The special commercial court granted the motion and
reasoned that only an action for liquidation of assets can be maintained when a
corporation has been dissolved and Bam cannot seek reliefs which in effect lead to
the continuation of the corporation‟s business. The court also ruled that it lost
jurisdiction over the intra-corporate controversy upon the dissolution of the
corporation. a. Was the court correct? b. Four years later, SN Company files an
action against Bam to recover corporate assets allegedly held by the latter for
liquidation. Will this action prosper? (2015 BAR)
A: a. The court is not correct. An action to be recognized as a stockholder and to
inspect corporate documents is an intra-corporate dispute which does not
constitute a continuation of business. The dissolution of the corporation simply
prohibits it from continuing its business. Moreover, under Section 145 of the
Corporation Code, no right or remedy in favor of or against any corporation, its
stockholders, members, directors and officers shall be removed or impaired by the
subsequent dissolution of the corporation. The dissolution does not automatically
convert the parties into strangers or change their intra-corporate relationship.
Neither does it terminate existing causes of action which arose because of the
corporate ties of the parties. The cause of action involving an intra- corporate
controversy remains and must be filed as an intra-corporate dispute despite the
subsequent dissolution of the corporation. (Aguirre v. FQB +7, Inc. GR no.
170770, Jan. 9, 2013)
b. The action cannot prosper because the corporation has no more legal capacity to
sue after three years from its dissolution. (Alabang Development Corporation v.
Alabang Hills Village Association, GR no. 187456, June 2, 2014)
Q: The SEC approved the amendment of the articles of incorporation of GHQ
Corporation shortening its corporate life to only 25 years in accordance with
Section 120 of the Corporation Code. As shortened, the corporation continued its
business operations until May 30, 1997, the last day of its corporate existence.
Prior to said date, there were a number of pending civil actions, of varying nature
but mostly money claims filed by creditors, none of which was expected to be
completed or resolved within 5 years from May 30, 1997. If the creditors had
sought your professional help at that time about whether or not their cases could be
pursued beyond May 30, 1997, what would have been your advice? (2000 BAR)
A: The cases can be pursued even beyond May 30, 1997, the last day of the
corporate existence of GHQ Corporation. The Corporation is not actually
dissolved upon the expiration of its corporate term. There is still the period for
liquidation or winding up.
Q: A group of stockholders of Sesame Corporation filed a court suit against the members
of the Board of Directors to make good to the shareholders, in proportion to their
shareholdings, the losses incurred by the corporation because the of defendant Board of
Directors‟ management. Will the action prosper? (1988 BAR)
A: The action will not prosper because the right belongs to the Corporation. Until the
corporation is dissolved and liquidation of assets shall have been made, the shareholders
have no right over any specific asset of the corporation (Sec. 122, Corporation Code).
The suit should have been filed instead by the and in the name of the corporation.
(Evangelista v. Santos, 64 Phil. 697; see also Gamboa v. Victoriano, 90 SCRA 40)
MERGER & CONSOLIDATION PROCEDURE
1. The Board of each corporation shall draw up a plan of merger or
Merger consolidation setting forth:
When one corporation (surviving corporation) absorbs another one or more 1. names of the corporations involved;
corporation/s into a single corporation. One of the constituent corporations 2. terms and mode of carrying the same into
survives and remains in existence, while the other corporations are dissolved(Sec. effect;
75 and 79, RCCP). 3. statement of changes, if any, in the present
Articles of Incorporation of the surviving
Consolidation corporation and for consolidation, all statements
One where a new corporation- consolidated corporation- is created, and the to be in the Articles of the new corporation to
existence of all the constituent corporations shall cease. be formed; and
4. other provisions deemed necessary (Sec. 75,
1. Merger or consolidation does not become effective by mere agreement of the RCCP).
constituent corporations. The approval of the SEC is required through the issuance
of a certificateapproving the articles and plan of merger or consolidation. Upon 2. The plan for merger or consolidation shall be approved bymajority
issuance of the certificate, the merger or consolidation becomes effective (Sec. 78, vote of each of the Board of the constituent corporations at separate
RCCP). meetings, and approved by 2/3 of the outstanding capital stock or
members for non-stock corporations (Sec. 76, RCCP).
2. De facto Merger- this is not a merger contemplated under the Corporation
Code. “A de facto merger can be pursued by one corporation acquiring all or 3. Any amendment to the plan must be approved by the majority vote
substantially all of the properties of another corporation in exchange of shares of of the Board of the constituent corporations and affirmative vote of
stock of the acquiring corporation. The acquiring corporation would end up with 2/3 of the outstanding capital stock or members(Sec. 76, RCCP).
the business enterprise of the target corporation; whereas, the target corporation
would end up with basically its only remaining assets being the shares of stock of 4. Articles of Merger or Articles of Consolidation shall be executed
the acquiring corporation.” by each of the constituent corporations, signed by the President or
Vice President and certified by the Secretary or Assistant Secretary
setting forth:
1. The plan of merger or consolidation;
2. For stock corporations, the number of shares
outstanding; for non-stock, the number of
DISTINGUISH: CONSTITUENT AND CONSOLIDATED CORPORATION members;
3. As to each corporation, number of share or
Constituent Corporation- One of the parties to a merger or consolidation. members voting for or against such plan
respectively;
Consolidated Corporation- A completely new corporation formed when two or 4. Thecarrying amounts and fair values of the
more corporations combined. assets and liabilities of the respective companies
as of the agreed cut-off date;
5. The method to be used in the merger or
consolidation of accounts of the companies;
6. The provisional or pro forma values, as merged
PLAN OF MERGER OR CONSOLIDATION(Sec. 75, RCCP) or consolidated, using the accounting method;
and
(1)2 or more corporations may merge into a single corporation which shall be 7. Such other information as may be prescribed by
one of the constituent corporations or may (2)consolidate into a new single the SEC (Sec. 77, RCCP).
corporation which shall be the consolidated corporation.
5. Copies of the Articles of Merger or Consolidation and Plan of
The board ofdirectors or trustees of each corporation, party to the merger or Merger shall be submitted to the SEC for approval. The merger or
consolidation, shall approve a plan of merger or consolidation setting forth the consolidation is effective upon approval by the SEC (Sec. 78,
following: RCCP). Merger or consolidation of banks, insurance companies,
1. The names of the corporations proposing to merge or consolidate, building and loan associations, trust companies, public utilities,
hereinafter referred to as the constituent corporations; educational institutions and other special corporations requires
2. The terms of the merger or consolidation and the mode of carrying favorable recommendation of the government agency concerned.
the same into effect;
3. A statement of the changes, if any, in the articles of incorporation of If the SEC has reason to believe that Articles of Merger or
the surviving corporation in case of merger; and, in case of Consolidation and the plan are inconsistent with the RCCP and other
consolidation, all the statements required to be set forth in the laws, the SEC shall set a hearing so that the corporations can have
articles of incorporation for corporations organized under this Code; opportunity to be heard. It is only after the hearing that the SEC can
and proceed (Sec. 78, RCCP).
4. Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or desirable.
EFFECTIVITY (Sec. 78, RCCP)

Effectivity of Merger or Consolidation

d. ARTICLES OF MERGER OR CONSOLIDATION (Sec. 77, RCCP)
After the approval by the stockholders or members, articles of merger or articles of
consolidation shall be executed by each of the constituent corporations, to be
signed by the president or vice president and certified by the secretary or assistant
secretary of each corporation setting forth:
1. The plan of the merger or the plan of consolidation;
2. As to stock corporations, the number of shares outstanding, or in the
case of non-stock corporations, the number of members;
3. As to each corporation, the number of shares or members voting for
or against such plan, respectively;
4. The carrying amounts and fair values of the assets and liabilities of
the respective companies as of the agreed cut-off date;
5. The method to be used in the merger or consolidation of accounts of
the companies;
6. The provisional or pro forma values, as merged or consolidated,
using the accounting method; and
7. Such other information as may be prescribed by the Commission.
The articles of merger or of consolidation, signed and certified as required by
this Code, shall be submitted to the Commission for its approval: Provided,
That in the case of merger or consolidation of banks or banking institutions, loan
associations, trust companies, insurance companies, public utilities, educational
institutions, and other special corporations governed by special laws, the
favorable recommendation of the appropriate government agency shall first be
obtained. If the Commission is satisfied that the merger or consolidation of the
corporations concerned is consistent with the provisions of this Code and existing
laws, it shall issue a certificate approving the articles and plan of merger or of
consolidation, at which time the merger or consolidation shall be effective.
If, upon investigation, the Commission has reason to believe that the proposed
merger or consolidation is contrary to or inconsistent with the provisions of this
Code or existing laws, it shall set a hearing to give the corporations concerned the
opportunity to be heard. Written notice of the date, time, and place of hearing shall
be given to each constituent corporation at least 2 weeks before said hearing. The
Commission shall thereafter proceed as provided in this Code.

8
EFFECTS
The merger or consolidation shall have the following effects:
1. The constituent corporations shall become a single corporation which, in
case of merger, shall be the surviving corporation designated in the plan of
merger; and, in case of consolidation, shall be the consolidated corporation
designated in the plan of consolidation;
2. The separate existence of the constituent corporations shall cease, except
that of the surviving or the consolidated corporation;
3. The surviving or the consolidated corporation shall possess all the rights,
privileges, immunities, and powers and shall be subject to all the duties
and liabilities of a corporation organized under this Code;
4. The surviving or the consolidated corporation shall possess all the rights,
privileges, immunities and franchises of each constituent corporation; and
all real or personal property, all receivables due on whatever account,
including subscriptions to shares and other choses in action, and every
other interest of, belonging to, or due to each constituent corporation, shall
be deemed transferred to and vested in such surviving or consolidated
corporationwithout further act or deed; and
5. The surviving or consolidated corporation shall be responsible for all the
liabilities and obligations of each constituent corporation as though such
surviving or consolidated corporation had itself incurred such liabilities or
obligations; and any pending claim, action or proceeding brought by or
against any constituent corporation may be prosecuted by or against the
surviving or consolidated corporation. The rights of creditors or liens upon
the property of such constituent corporations shall not be impaired by the
merger or consolidation (Sec. 79, RCCP).
6. By reason of the dictates of social justice and the State policy of according
full protection to labor, employment contracts are automatically assumed
by the surviving corporation in a merger, even in the absence of an express
stipulation in the articles of merger or the merger plan (BPI vs. BPI
employees Union, GR No. 164301, October 19, 2011). However, the rule
on automatic assumption or absorption does not impair the right of an
employer to terminate the employment of the absorbed employees for a
lawful or authorized cause or the right of such an employee to resign,
retire, or otherwise sever his employment, whether before or after the
merger, subject to existing contractual obligation.
Q: Two corporations agreed to merge. They then executed an agreement specifying the
surviving corporation and the absorbed corporation. Under the agreement of merger dated
November 5, 1998, the surviving corporation acquired all the rights, properties and
liabilities of the absorbed corporation. a. What would happen to the absorbed
corporation? Must the absorbed corporation undertake dissolution and the winding up
procedures? Explain your answer. b. Pending the approval of the merger by the SEC, may
the surviving corporation already institute suits to collect all receivables due to the
absorbed corporation from its customers? Explain your answer. c. A case was filed
against a customer to collect on the promissory note issued by him after the date of the
merger agreement. The customer raised the defense that while the receivables as of the
date of the merger agreement were transferred to the surviving corporation, those
receivables which were created after the merger agreement remained to be owned by the
absorbed corporation. These receivables would be distributed to the stockholders
conformably with the dissolution and liquidation procedures under the New Corporation
Code? Discuss the merits of this argument. (1999 BAR)
A:
a. NO. There is no need for the absorbed corporation to undertake dissolution and
winding up procedure. As a result of the merger, the absorbed corporation is
automatically dissolved and its assets and liabilities are acquired and assumed by the
surviving corporation.
b. NO. The merger does not become effective until and unless approved by the SEC.
before the approval by the SEC of the merger, the surviving corporation has no legal
personality with respect to receivables due to the absorbed corporation. c. Whether the
receivable was incurred by the absorbed corporation before or after the merger
agreement, or before or after the approval thereof by the SEC, the said receivable would
still belong to the surviving corporation under Section 80 of the Corporation Code which
does not make any distinction as to the assets and liabilities of the absorbed corporation
that the surviving corporation would inherit.
Q: Under the Nell Doctrine, so called because it was first pronounced by the Supreme
Court in the 1965 ruling in Nell v. Pacific Farms, Inc. (15 SCRA 415), the general rule is
that where one corporation sells or otherwise transfers all of its assets to another
corporation, the latter is not liable for the debts and liabilities of the transferor. State the
exceptions to the Nell Doctrine. (2017 BAR)
A. The exceptions to the Nell doctrine are as follows:
1. When the buyer expressly or impliedly assumes the liabilities of the seller.
2. If the sale amounts to a merger or consolidation.
3. If the sale is entered into fraudulently or made in bad faith.
4. If the buyer is merely a continuation of the personality of the seller or the so-called
business - enterprise transfer rule.
Q: The SEC approved the amendment of the Articles of Incorporation of GHQ Corp
shortening its corporate life to only 25 years in accordance with Sec 120 of the Corp
Code. As shortened, the corporation continued its business operations until May 30,
1997, the last day of its corporate existence. Prior to said date, there were a number of
pending civil actions, of varying nature but mostly money claims filed by creditors, none
of which was expected to be completed or resolved within five years from May 30, 1997.
If the creditors had sought your professional help at that time about whether or not their
cases could be pursued beyond May 30, 1997, what would have been your advice? (2000
BAR)
A: The cases can be pursued even beyond May 30, 1997, the last day of the corporate
existence of GHQ Corp. The Corporation is not actually dissolved upon the expiration of
its corporate term. There is still the period for liquidation or winding up.
9
Q: AAA Corporation is a bank. The operations of AAA Corporation as a bank was not
doing well. So, to avert any bank run, AAA Corporation, with the Commercial Law 68
approval of the Monetary Board, sold all its assets and liabilities to BBB Banking
Corporation which includes all deposit accounts. In effect then, BBB Corporation will
service all deposits of all depositors of AAA Corporation. a. Will the sale of all assets and
liabilities of AAA Corporation to BBB Banking Corporation automatically dissolve or
terminate the corporate existence of AAA Corporation? Explain your answer. b. What are
the legal requirements in order that a corporation may be dissolved? (2012 BAR)
A:
a. NO. AAA Corporation is an artificial being created by law and has a legal personality
of its own. A corporation does not owe its existence upon the presence of assets and
properties. It can only be dissolved in cases provided for by law. As such, AAA
Corporation will subsist regardless of the sale of all of its assets and liabilities to another
corporation.
b. A corporation may be dissolved voluntarily, by shortening of the corporate term and
through involuntary dissolution. In voluntary dissolution, the action for dissolution must
be approved by majority of the directors or trustees and 2/3 of the stockholders
representing the outstanding capital stock or members, publication requirement and filed
with SEC which will issue certificate of dissolution. If there are creditors affected, there
must be a hearing to hear the objections and claims of the creditors.
In case of shortening of corporate term, through amendment of the AOI. In involuntary
dissolution, through filing of a verified complaint with the SEC based on any ground
provided by law or rules
Q: The corporation, once dissolved, thereafter continues to be a body corporate for 3
years for purposes of prosecuting and defending suits by and against it and of enabling it
to settle and close its affairs, culminating in the final disposition and distribution of its
remaining assets. If the 3- year extended life expires without a trustee or receiver being
designated by the corporation within that period and by that time (expiry of the 3-year
extended term), the corporate liquidation is not yet over, how, if at all, can a final
settlement of the corporate affairs be made? (1997 BAR)
A: The liquidation can continue with the winding up. The members of the Board of
Directors can continue with the winding of the corporate affairs until final liquidation.
They can act as trustees or receivers for this purpose.
AUTHORITY OF THE SECURITIES AND EXCHANGE COMMISSION
Express Powers under the RCCP
1. Exercise supervision and jurisdiction over all corporations and persons
acting on their behalf, except as otherwise provided under this Code;
2. Pursuant to Presidential Decree No. 902-A, retain jurisdiction over
pending cases involving intracorporate disputes submitted for final
resolution. The Commission shall retain jurisdiction over pending
suspension of payment/rehabilitation cases filed as of 30 June 2000 until
finally disposed;
3. Impose sanctions for the violation of this Code, its implementing rules and
orders of the Commission;
4. Promote corporate governance and the protection of minority investors,
through, among others, the issuance of rules and regulations consistent
with international best practices;
5. Issue opinions to clarify the application of laws, rules, and regulations;
6. ssue cease and desist orders ex parte to prevent imminent fraud or injury
to the public;
7. Hold corporations in direct and indirect contempt;
8. Issue subpoena duces tecum and summon witnesses to appear in
proceedings before the Commission;
9. In appropriate cases, order the examination, search and seizure of
documents, papers, files and records, and books of accounts of any entity
or person under investigation as may be necessary for the proper
disposition of the cases, subject to the provisions of existing laws;
10. Suspend or revoke the certificate of incorporation after proper notice and
hearing;
In imposing penalties and additional monitoring and supervision requirements, the
Commission shall take into consideration the size, nature of the business, and
capacity of the corporation (Sec. 179, RCCP).
No Injunction
No court below the Court of Appeals shall have jurisdiction to issue a restraining order,
preliminary injunction, or preliminary mandatory injunction in any case, dispute, or
controversy that directly or indirectly interferes with the exercise of the powers, duties,
and responsibilities of the Commission that falls exclusively within its jurisdiction.
Other Powers
1. Visitorial Powers- The SEC shall exercise visitorial powers over all
corporations, which powers shall include the examination and inspection
of records, regulations, and supervision of activities, enforcement of
compliance, and imposition of sanctions in accordance with this Code
(Sec. 179, RCCP).
2. Investigation- the SEC can investigate alleged violation of the RCCP and
impose administrative sanctions. It can also transmit evidence to the
Department of Justice for preliminary investigation or criminal
prosecution(Sec. 154 and 158, RCCP).
INVESTIGATION AND OFFENSES
PROHIBITED ACTS & PENALTIES
AUTHORITY OF COMMISSIONER
i. INVESTIGATION AND PROSECUTION OF OFFENSES (Sec. 154, RCCP)
The Commission may investigatean alleged violation of thisCode, or of rule,
regulation, or order of the Commission.
The Commission may publish its findings, orders, opinions, advisories, or
information concerning any such violation, as may be relevant to the general public
or to the parties concerned, subject to the provisions of Republic Act No. 10173
(Data Privacy Act of 2012), and other pertinent laws.
The Commission shall give reasonable notice to and coordinate with the
appropriate regulatory agencyprior to any such publication involving companies
under their special regulatory jurisdiction.
ii. ADMINISTRATION OF OATH AND ISSUANCE OF SUBPOENA (Sec.
155, RCCP)
The Commission, through its designated officer, may (1) administer oaths and
affirmations, (2) issue subpoena and subpoena duces tecum, (3) take testimony in
any inquiry or investigation, and (4) may perform other acts necessary to the
proceedings or to the investigation.
iii. CEASE AND DESIST POWER (Sec. 156, RCCP)
Whenever the Commission has reasonable basis to believe that a person has
violated, or is about to violate, this Code, a rule, regulation, or order of the
Commission, it may direct such person to desist from committing the act
constituting the violation.
The Commission may issue a cease and desist order ex parteto enjoin an act or
practice which is fraudulent or can be reasonably expected to cause significant,
imminent, and irreparable danger or injury to public safety or welfare. The ex parte
order shall be valid for a maximum period of 20 days, without prejudice to the
order being made permanent after due notice and hearing.
Thereafter, the Commission may proceed administratively against such person in
accordance with Section 158 of this Code, and/ortransmit evidence to the
Department of Justice for preliminary investigation or criminal prosecution
and/or initiate criminal prosecution for any violation of this Code, rule, or
regulation.
iv. CONTEMPT (Sec. 157, RCCP)
Any person who, without justifiable cause, fails or refuses to comply with any
lawful order, decision, or subpoena issued by the Commission shall, after due
notice and hearing, be held in contempt and fined in an amount not exceeding
P30,000.00. When the refusal amounts to clear and open defiance of the
Commission‟s order, decision, or subpoena, the Commission may impose a daily
fine of P1,000.00 until the order, decision, or subpoena is complied with.
SANCTIONS FOR VIOLATIONS
i. ADMINISTRATIVE SANCTIONS (Sec. 158, RCCP)
If, after due notice and hearing, the Commission finds that any provision of this
Code, rules or regulations, or any of the Commission‟s orders has been violated, the
Commission may impose any or all of the following sanctions, taking into
consideration the extent of participation, nature, effects, frequency and seriousness
of the violation:
1. Imposition of a fine ranging from P5,000.00 to P2M, and not more than
P1,000.00 for each day of continuing violation but in no case to exceed
P2M;
2. Issuance of a permanent cease and desist order;
3. Suspension or revocation of the certificate of incorporation; and
4. Dissolution of the corporation and forfeiture of its assets under the
conditions in Title XIV of this Code.
ii. WHO ARE LIABLE
Liability of Directors, Trustees, Officers, or Other Employees
If the offender is a corporation, the penalty may, at the discretion of the court, be
imposed upon such corporation and/or upon its directors, trustees, stockholders,
members, officers, or employeesresponsible for the violation or indispensable to its
commission(Sec. 171, RCCP).
Liability of Aiders and Abettors and Other Secondary Liability
Anyone who shall aid, abet, counsel, command, induce, or cause any violation of
this Code, or any rule, regulation, or order of the Commission shall be punished
with a fine not exceeding that imposed on the principal offenders, at the discretion
of the court, after taking into account their participation in the offense.
10
1. Unauthorized use of corporate name-punished with a (1) fine ranging
from P10,000- P200,000(Sec. 159, RCCP).
2. Violation of disqualification provision- When, despite the knowledge of
the existence of a ground for disqualification, a director, trustee, or
officerwillfully holds office, or willfully conceals such disqualification,
such punished with a (1) fine ranging from P10,000- P200,000at the
discretion of the court, and shall be (2) permanently disqualified from
being a director, trustee or officerof any corporation. When the
violation of this provision is (3) injurious or detrimental to the public,
the penalty shall be a fine ranging from P20,000- P400,000 (Sec. 160,
RCCP).
3. Violation of duty to maintain records, to allow their inspection or
reproduction-punished with a (1) fine ranging fromP10,000- P200,000, at
the discretion of the court. When the violation (2) is injurious or
detrimental to the public, the penalty is a fine ranging from P20,000-
P400,000 The penalties shall be without prejudice to the Commission‟s
exercise of its contempt powers (Sec. 161, RCCP).
4. Willful certification of incomplete, inaccurate, false, or misleading
statements or reports- Punished with a (1) fine ranging from P20,000-
P200,000. When it is (2) injurious or detrimental to the public, the (3)
auditor or the responsible person may also be punished with a fine ranging
fromP40,000- P400,000 (Sec. 162, RCCP).
5. Independent auditor collusion- An independent auditor who, in collusion
with the corporation‟s directors or representatives, certifies the
corporation‟s financial statements despite its incompleteness or
inaccuracy, shall be punished with a (1) fine ranging fromP80,000-
P500,000. When the statement or report certified is (2) fraudulent, or has
the effect of causing injury to the general public, the auditor or
responsible officer may be punished with a fine ranging from P100,000-
P600,000 (Sec. 163, RCCP).
6. Obtaining corporate registration through fraud- Those responsible or
who assisted directly or indirectly therein, shall be punished with a (1) fine
ranging from P200,000- P2M. When the violation of this provision is (2)
injurious or detrimental to the public, the penalty is a fine ranging from
P400,000- P5M(Sec. 164, RCCP).
7. Fraudulent conduct of business- Punished with a(1) fine ranging from
P200,000- P2M. When the violation is (2) injurious or detrimental to
the public, the penalty is a fine ranging from P400,000- P5M (Sec. 165,
RCCP).
8. Acting as intermediaries for graft and corrupt practices- Liable for a
(1) fine ranging from P100,000.00- P5M. (2) When its directors, officers,
employees, agents, or representatives are engaged in graft and corrupt
practices, the corporation‟s failure to install:
a. safeguards for the transparent and lawful delivery of
services; and
b. policies, code of ethics, and procedures against graft
and corruption shall be prima facie evidence of
corporate liability under this section(Sec. 166,
RCCP).
9. Engaging intermediaries for graft and corrupt practices- (1) fine
ranging from P100,000.00- P1M (Sec. 167, RCCP).
10. Tolerating graft and corrupt practices- A director, trustee, or officer
who knowingly allows or tolerates the graft and corrupt practices or
fraudulent acts committed by a corporation‟s directors, trustees, officers,
or employees shall be punished with a (1) fine ranging from P500,000-
P1M (Sec. 168, RCCP).
11. Retaliation against whistleblowers- – A whistleblower refers to any
person who provides truthful information relating to the commission or
possible commission of any offense or violation under this Code. Any
person who, knowingly and with intent to retaliate, commits acts
detrimental to a whistleblower shall, at the discretion of the court, be
punished with a (1) fine ranging from P100,000.00- P1M (Sec. 169,
RCCP).
12. Other violations of the code-(1) fine of not less than P10,000 but not
more than P1M. (2) If the violation is committed by a corporation, the
same may, after notice and hearing, be dissolved in appropriate
proceedings before the Commission: Provided, That such dissolution shall
not preclude the institution of appropriate action against the director,
trustee, or officer of the corporation responsible for said violation:
Provided, further, That nothing in this section shall be construed to repeal
the other causes for dissolution of a corporation provided in this Code.
Liability for any of the foregoing offenses shall be separate from any other
administrative, civil,or criminal liability under this Code and other laws
(Sec. 170, RCCP)